The Stabilization of an Open Economy with Capital Controls: An Analysis Using Malaysian Data

2003 ◽  
Vol 2 (3) ◽  
pp. 63-83 ◽  
Author(s):  
Naoyuki Yoshino ◽  
Sahoko Kaji ◽  
Yoko Ibuka
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Open Economy ◽  
Exchange Rate Volatility ◽  
Capital Controls ◽  
Loss Functions ◽  
Economic Welfare ◽  
Real Gdp ◽  
Net Exports ◽  
Fixed Exchange Rates

The purpose of this paper is to analyze the effectiveness of capital controls and fixed exchange rates in improving economic welfare. We apply Malaysian data to our theoretical model and derive the following results for the period of our estimation. High exchange rate volatility negatively affects Malaysian net exports and real GDP. By stabilizing the exchange rate and recovering monetary policy autonomy, capital controls and fixed exchange rates can lead to lower values of loss functions. This beneficial effect is stronger, the more open the Malaysian economy.

INVESTMENT AND REAL EXCHANGE RATES IN STICKY PRICE MODELS

2012 ◽  
Vol 17 (2) ◽  
pp. 195-234 ◽  
Author(s):  
Enrique Martínez-García ◽  
Jens Søndergaard
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Capital Accumulation ◽  
Real Exchange Rates ◽  
Exchange Rate Volatility ◽  
Monetary Shocks ◽  
Productivity Shocks ◽  
Exogenous Shocks

This paper investigates how the inclusion of capital in the workhorse new open economy macro model affects its ability to generate volatile and persistent real exchange rates. We show that capital accumulation facilitates intertemporal consumption smoothing and significantly reduces the volatility of the real exchange rate. Nonetheless, monetary and investment-specific technology (IST) shocks still induce more real exchange rate volatility and less consumption comovement than productivity shocks (with or without capital). We find that endogenous persistence is particularly sensitive to the inertia of the monetary policy rule even with persistent exogenous shocks. However, irrespective of whether capital is present, productivity and IST shocks trigger highly persistent real exchange rates, whereas monetary shocks do not. Moreover, we point out that IST shocks tend to generate countercyclical real exchange rates—unlike productivity or monetary shocks—but have the counterfactual effect of also producing excessive investment volatility and countercyclical consumption.

scholarly journals Dynamic Relationship Between Real Export, Real Import, Real Exchange Rate, Labor Force and Real Gross Domestic Product in Malaysia

2019 ◽  
Vol 10 (5) ◽  
pp. 20
Author(s):  
Emilda Hashim ◽  
Norimah Rambeli ◽  
Asmawi Hashim ◽  
Norasibah Abdul Jalil ◽  
Shahrun Nizam Abdul Aziz ◽  
...  
Keyword(s):  
Exchange Rate ◽  
Labor Force ◽  
Open Economy ◽  
Unit Root ◽  
Correction Term ◽  
Unit Root Test ◽  
Real Effective Exchange Rate ◽  
Global Changes ◽  
Real Gdp ◽  
Long Run

This study examined short run and long run relationship between endogenous and exogenous variables. Specifically, it studied the relationship between real export, real import, labor force participation and real effective exchange rate (REER) and real GDP in Malaysia from 1988 to 2017. These variables were tested in various tests, namely, unit root test, granger causality test, vector autoregressive (VAR), Johansen Juselius test and Error Correction Term (ECT). The result revealed that all variables were non-stationary at the level form and stationary at first difference in ADF unit root test. The findings also exhibited the existence of bilateral relationships between real export and real GDP, real import and real GDP, as well as labor and real GDP. Nonetheless, there were no relationship found between REER and real GDP. On the other hand, in VAR, the lag optimum was lag 10 because it indicated the smallest value of AIC. Moreover, for Johansen Juselius cointegration test, it showed two cointegrated vector at both, 5% and 1%, level in trace test. In addition, Max-Eigen value test indicated two cointegrated vector at 0.05 and one cointegrated vector at 0.01. As for the Wald test, there were long run cointegration relationship between real GDP and its determinants, namely real export, real import, labor and REER. Apparently, Malaysia, as a small open economy, has relied heavily on foreign trade. Consequently, our domestic economic performance is susceptible to the changes in international markets and exchange rate. Therefore, suitable international policy implementation is vital to ensure Malaysian economy will be able to adjust to current global changes.

Modelling the Open Economy, Devaluation, and the Exchange Rate in Developing Countries

2020 ◽  
pp. 277-306
Author(s):  
Giovanni Andrea Cornia
Keyword(s):  
Developing Countries ◽  
Exchange Rate ◽  
Open Economy ◽  
Exchange Rate Volatility ◽  
Empirical Literature ◽  
Economy Model ◽  
Poor Countries ◽  
Pros And Cons ◽  
External Sector ◽  
The Impact

The chapter first examines the limitations of conventional open-economy macro models, such as the Mundell–Fleming model, when they are applied to developing countries. It discusses the Swan–Salter model and the three-sector dependent-economy model that better capture the reality of the external sector in poor countries. It then discusses the impact of devaluation under conditions of closed and open capital accounts and shows the limitation of a devaluation unaccompanied by structural measures in little diversified poor economies and in economies with large dollar liabilities. In this regard, it examines the results of the empirical literature on the contractionary or expansionary effect of devaluation in developing countries. Finally, it reviews the pros and cons of alternative exchange rate regimes, the impossible trinity theorem, and measures to control exchange rate volatility through capital controls.

Löhne, Wechselkurse und Beschäftigung

1997 ◽  
Vol 46 (1) ◽  
Author(s):  
Ulrich van Suntum
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
International Competitiveness ◽  
Currency Union ◽  
Wage Level ◽  
Wage Policy ◽  
Labour Costs ◽  
Fixed Exchange Rates ◽  
Unit Labour Costs ◽  
The Impact

AbstractIn recent time it has been argued that Germanys international competitiveness had suffered more from the strong D-Mark than from the national wage level. As a proof it has been pointed to the relative impact of these two factors on the level of German unit labour costs, measured in terms of international currency.It is shown that neither the real exchange rate nor international unit labour costs are an unambiguous indicator of international competitiveness. On the other hand, the seemingly naive indicator of the rise in unit labour costs in national currency is by far more relevant in evaluating the impact of the wage level on national employment, at least in the long run. This is true in case of flexible as well as in the case of fixed exchange rates and also in case of a currency union. Moreover, it is argued that a flexible exchange rate will never do the job of outweighing the negative effects on employment caused by a rise in wages which is in excess of the rise in productivity. Hence with flexible exchange rates national real wage policy must bee eaqually aware of employment needs like with fixed exchange rates or in case of a currency union.

scholarly journals Monetary Policy and the Predictability of Nominal Exchange Rates

2020 ◽  
Author(s):  
M S Eichenbaum ◽  
B K Johannsen ◽  
S T Rebelo
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Real Exchange Rates ◽  
Nominal Exchange Rate ◽  
Medium Size ◽  
Inflation Rates ◽  
Nominal Exchange Rates

Abstract This article studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size, open-economy DSGE model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that drive the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

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